Have we seen a bottom for the pound?

Theresa May provided the pound with a surprisingly bullish week. However, are we on the cusp of a bullish phase for the currency?

Bank of England
Source: Bloomberg

Tuesday’s speech from Theresa May laid out a very clear outlook for the UK’s stance in relation to Brexit negotiations, choosing to favour a hard Brexit. The fear of a hard Brexit has been one of the core drivers of sterling weakness over recent months, with traders highly sensitive to any comments from high level UK and EU politicians. However, Tuesday’s speech threw everything into the open, clarifying the government’s position and negating the harmful conjecture of late.

The result came as a surprise, with the pound rising sharply despite the apparently negative news. Was this a sell the rumour, buy the fact moment? Was it down to the announcement of an eventual vote in parliament, which some feel could scupper the process? Or was it the sheer relief that we can finally lay to rest the fears that have plagued the pound for months?

From an economic perspective, there is certainly good reason to believe we are overdue a rebound, with the UK economy faring well. Falling unemployment, resilient GDP growth and a strong services PMI trend point towards an economy which is faring well despite the fear of the future. The chart below highlights that typically we see the services PMI and GBP/USD move together, with a period of strength for the services sector typically denoting a strong economy, thus releasing the pressure on the Bank of England (BoE) to ease further. However, we have recently seen that relationship come into question, with the pound deteriorating despite a strengthening services sector. Could this mean we will see the relationship come back into play, with either a deterioration in UK data, or else a recovery for the pound?

However, arguably those numbers are good precisely because the pound is so low and in fact the pound is devalued thanks to the negative outlook of how years of Brexit negotiations are going to impact the country. For now, that is conjecture and with the fear of whether a hard Brexit is upon us no longer an issue, is there a basis for sterling to regain some of the ground we have seen over the past year?

The weekly chart below shows how notable this week’s recovery has been for GBP/USD, with the pair rallying from the 76.4% retracement. The wedge pattern leading into recent losses provides us with a bearish signal, yet there are certain things that could occur to provide a more bullish view. Firstly, a closed daily close above $1.2795 would be required for the pair to start to look bullish on the long-term perspective. 

On the shorter view, the four-hour char shows the breakout throughout trendline resistance has subsequently seen a retest of that line as new-found support. Crucially, for the shorter-term view to become bullish, we would need to see a break through $1.2433, which would negate the wider bearish trend in place since the wedge breakdown.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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